The spatial selection of heterogeneous quality: An approach using different demand elasticities

This paper incorporates heterogeneous demand elasticities and the quality/skill complementarity of production in a footloose capital model in order to explain the spatial selection of firms with differentiated quality. We find that when trade becomes freer, high-quality firms agglomerate in the region that accommodates more high-skilled labor, whereas low-quality firms move to the region that hosts more low-skilled labor. If trade freeness is high, the spatial separation of high- and low-quality firms occurs. This paper also points out the positive effect of integration on welfare owing to the specialization of product quality.